Archived entries for $FB

When we last looked at Facebook’s (NASDAQ:FB) payments business we predicted that revenue would plateau as more of its user base transitioned to mobile usage. We made this deduction by observing the trend in payments revenue and ARPU in Asia and rest of world regions, where platform usage is mobile-first or mobile-only. We can now conclude that payments revenue has plateaued as Facebook continues its structural shift to mobile. Further, by using games revenue as an indicator we can deduce that payments revenue will remain flat or decline in the short run.

Payments revenue in Q1 2015 was $226 million, a decline of 5% over the year-ago quarter. According to the company, the year-over-year decrease in payments revenue resulted from a decline in revenue (including in-app transaction revenue) from games played on Facebook on desktop computers. Games revenue makes up materially all of Facebook’s payments revenue, so it serves as a strong proxy for the viability of the payments business. The downward trend in games revenue has been acknowledged by Facebook in successive earnings calls since Q3 2014, and it is reflected in flat revenue for payments.

With its Q1 2014 earnings, Facebook demonstrated its continued structural shift to a mobile company. The company’s mobile active users for the first time crossed the 1B mark. Mobile active users are also growing faster than any other user base segment. This user base shift is reflected in Facebook’s changing revenue composition, bearing out the company’s past commitment to transition to a mobile-first company.1

Facebook’s user base now sits just below 1.28B MAUs (monthly active users). When we visualize Facebook’s usage composition we can see that its mobile user base is on track to reach or exceed its current total user base. We can also see that mobile-only usage is growing quickly, increasing 15% sequentially. We can conclude that Facebook is increasingly hired as a mobile platform.2 It is unsurprising, then, that Facebook’s revenue composition reflects this shift.

Facebook saw $2.5B in revenue in the first quarter, a 72% year-over-year increase. The company’s payments business saw only a modest year-over-year increase.3 The bulk of its revenue growth accrued to its advertising business. And it is here that we see the consequence of the shift in Facebook’s user base composition. In the first quarter, Facebook’s mobile ad revenue was 59% of its total ad revenue, up from 30% over the year-ago quarter.

When we last examined Facebook’s capex, we observed that year-over-year the company’s spending on property and equipment has been declining. We concluded that the reduction in network infrastructure spending reflected a maturation of the company’s infrastructure and platform. Facebook’s somewhat modest FY 2013 capex bears out this thesis. However, Facebook’s WhatsApp acquisition raises questions about capex going forward.

Facebook estimated that capex in 2013 would grow at only 12%, totalling an estimated $1.8B (later revised down to $1.6B). As we noted previously, this would reflect a slowing capex growth rate. In fact, a combination of efficiency investments on the hardware and the software side have further driven down realized capital spending in the year. According to its 10-K, as a result of these investments, total capex was a more modest $1.36B.

By tracking the historical cost of Facebook’s property and equipment we can see that the majority of capital spending is directed to growing or maintaining the company’s network infrastructure. This includes the purchase or lease of servers and other network equipment, and building costs for Facebook’s growing list of data centers. This also explains the bulk of the decline in capex over the year, with only a small increase in nominal cost in Q4 2013.

Facebook recently announced its acquisition of WhatsApp for $16B in cash and stock, plus another $3B in RSUs.1 The acquisition was not surprising; mobile messaging is clearly of systemic importance to any mobile platform (except according to Twitter). However, the terms of the acquisition elicited some surprise, given Facebook’s recently failed attempt to acquire SnapChat for a more modest reportedly $1B. Putting aside its valuation for now, we should realize that WhatsApp’s strategic value to Facebook is substantive:

When you put the $FB WhatsApp acquisition into a broader strategy to build and monetize an emerging market user base it starts to make sense.

One might be tempted to define the acquisition in terms of technology or intellectual capital (32 engineers); however, WhatsApp’s value to Facebook is properly defined as user acquisition. The messaging app boasts 450M monthly active users, with an estimated 315M daily active users. This puts WhatsApp almost on equal footing with Facebook in terms of its active mobile user base. The significance of this position cannot be understated.

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Continuance, a Facebook analysis blog, explores operational and financial indicators to evaluate Facebook and its stock performance, and evaluates trends in social networking and mobile communications.